Month: July

Preeti Tex v. Income-tax Officer,

Ward-II(4), Coimbatore

A.Y. : 2003-04. Dated : 18-1-2008

S. 36(1)(vii) of the Income-tax Act — Since debts could not
be recovered in spite of best efforts, whether assessee was entitled to
deduction u/s.36(1)(vii) — Held, Yes.

The assessee-firm had entered into a Cost, Insurance and
Freight (CIF) agreement with a certain Bangladeshi party for selling its
goods. When the goods reached Custom station of Benapole inside Bangladesh,
said party failed to pay for goods after having acknowledged receipt of goods
at Custom station. Therefore, the assessee claimed value of goods from foreign
buyer. Despite making an honest attempt to recover the said amount, the
assessee could not recover the same and, therefore, had written-off said
amount as bad debts in its books of account during the year and claimed
deduction of same u/s.36(1)(vii). The Assessing Officer rejected its claim. On
appeal, the Commissioner (Appeals) found that there was no evidence on the
part of the assessee to show as to what legal steps were taken by it against
the buyer or its bank to recover its money. He, therefore, rejected the
assessee’s claim.

On second appeal : the ITAT held that :

(1) Under a CIF contract, seller is required to insure
the goods; to deliver them to the shipping company; to arrange for
affreightment; and to send the bill of lading and insurance policy together
with invoice and a certificate of origin to a bank.

(2) The documents are usually delivered by the bank
against the payment of price or against the acceptance of the bill.

(3) The property in the goods passes on to the buyer on
the delivery of documents. In the instant case, it was not disputed that the
buyer had got the delivery of documents.

(4) In a CIF contract the buyer has got to accept the
documents and to pay the price, even if the goods are destroyed or lost. In
that case, he has the remedy against the insurer to recover the loss.

(5) The whole documents the assessee relied upon had
clearly proved the completed wholesome CIF contract and the assessee had
taken an honest decision as contemplated on the part of the duty of the
seller. The insurance was perfectly made. All requirements of CIF contract
were satisfied. Therefore, the assessee could not be faulted with
transaction. As per the C&F terms, the goods were sold and the fact that the
goods had reached the Custom station was not at all disputed.

(6) The fact that the goods were lost or destroyed in a
fire at the Custom port in Bangladesh was also not disputed. Under the above
circumstances, the amounts were due under two of the invoices for goods sold
on C&F terms and the goods were exported on C&F terms after fulfilling all
the conditions for entering into C&F contract, the goods were covered by
transit insurance arranged by the buyer.

Under the above facts and circumstances, in spite of honest
efforts made by the assessee, the debts could not be recovered and in view of
the honest decision of the assessee the book debts were written-off for the
previous year relevant to the assessment year under appeal. Therefore, the
claim of the assessee was to be allowed.

Mohan Breweries & Distilleries Ltd. v. ACIT
(Chennai)

A.Y. : 2004-05. Dated : 31-10-2007

S. 80IA of the Income-tax Act, 1961 — Whether S. 80-IA(2)
gives an option to assessee to claim relief u/s.80-IA for any 10 consecutive
assessment years out of 15 years beginning from year in which undertaking or
enterprise develops or begins to operate any infrastructure facility, etc.,
and it does not mandate that first year of 10 consecutive assessment years
should be always first year of set-up of enterprise — Held, Yes — Whether
provision of S. 80-IA(5), treating eligible undertaking as a separate sole
source of income, is applicable only when assessee chooses to claim deduction
u/s.80-IA and same cannot be applied to a year prior to the year in which
assessee opted to claim relief u/s.80-IA for first time — Held, Yes.

The assessee-company had started three power projects, two
in the previous year, relevant to the A.Y. 1996-97 and one in the previous
year, relevant to the assessment year 1999-2000. In respect of the profits of
these power units, the assessee claimed deduction u/s.80-IA for the first time
in the A.Y. 2004-05. The Assessing Officer held that while computing the gross
total income of the eligible units, the notional brought forward loss incurred
by those units in earlier years had to be taken into account first and after
that, if any remaining profit was available then the deduction u/s.80-IA had
to be given.

On appeal, the Commissioner (Appeals) upheld the order of
the Assessing Officer. On second appeal, the ITAT held that :

(1) S. 80-IA gives an option to the assessee to claim
relief under this section for any 10 consecutive assessment years out of 15
years beginning from the year in which the undertaking or enterprise
develops or begins to operate any infrastructure facility, etc.

(2) S. 80-IA(2) does not mandate that first year of 10
consecutive assessment years should be always the first year of set-up of
enterprise.

(3) The provision of S. 80-IA(5) is applicable only when
the assessee chooses to claim deduction u/s.80-IA and if it has not chosen
to claim the deduction u/s.80-IA, S. 80-IA(5) cannot be made applicable.

(4) In the instant case, there was a categorical finding
by the Assessing Officer and the Commissioner (Appeals) that the first year
claimed by the assessee was from the A.Y. 2004-05. Hence, the initial
assessment year could not be the year in which the undertaking commenced its
operations but it was the assessment year in which the assessee had chosen
to claim deduction u/s.80-IA. Therefore, there was no question of
setting-off notionally carried forward unabsorbed depreciation or loss of
earlier years against the profits of the units and the assessee was entitled
to claim deduction u/s.80-IA on the current assessment year’s profit.

Indus Motor Co. Ltd. v. ACIT

A.Y. : 1998-99. Dated : 24-1-2007

Whether if application filed by assessee for additional
time for removing the defect in the return u/s.139(9), is not disposed of or
no action is taken and if Assessing Officer remains silent then time asked for
by assessee would be treated as granted by Assessing Officer — Held, Yes.

The assessee-company filed its return of loss on
30-11-1998, but it could not attach the statutory audit report with it.
Consequently, the Assessing Officer issued letter to the assessee asking it to
rectify said defect. On receipt of the letter, the assessee filed application
requesting for extension of time till 5-3-1999 for filing the audit report as
per the deficiency letter. However, there was no communication from the
Assessing Officer in response to the said application of the assessee.
Subsequently, the assessee filed another return of loss on 5-3-1999 revising
the loss. The Assessing Officer completed the assessment u/s.143(3) but the
said loss was refused to be carried forward and set-off in future on the
ground that the assessee had filed its revised return of loss after the due
date. On appeal, the Commissioner (Appeals) upheld the impugned order.

On second appeal, the ITAT held that :

1. As per the provisions of S. 80, if the return of
income is not filed as provided u/s.139(3) the loss determined shall not be
carried forward and allowed to be set-off under the relevant provisions.

2. S. 139(9) provides that if the return furnished by the
assessee is defective then the AO may intimate the defect to him and give
him an opportunity to rectify the defect within a period of 15 days or
within such further period on an application made by the assessee as the
Assessing Officer in his discretion may allow.

3. In the instant case, the assessee filed an application
requesting for further period to rectify the defect. It had requested the AO
for time up to 5-3-1999 to file the return. It was the duty of the AO to
dispose of the application filed by the assessee, either granting the
additional time or refusing the same. But the AO did not act on the said
application.

4. If the application filed by the assessee for
additional time is not disposed of or no action is taken and if the
Assessing Officer remains silent, then time asked for by the assessee would
be treated as granted by the Assessing Officer.

5. Another aspect to be considered was that if it was not
a valid return, then how the assessment was framed u/s.143(3). The returns
filed by assessee on 30-11-1998 as well as on 5-3-1999 were valid returns
and there was no bar to carry forward determined loss as per S. 80.

ACIT v. S. Prabhakar Kamath

A.Ys. : 1995-96 to 1998-99

Dated : 30-4-2007

Whether as per S. 26, any income which is chargeable under
head ‘Income from house property’ is to be assessed in hands of co-owners if
their shares are ascertainable and such income cannot be taxed in hands of AOP — Held,
Yes.

The assessees, four individuals, purchased a plot of land
and thereafter constructed a commercial complex thereon. Each co-owner had
equal undivided share in the entire property. A part of the said complex was
given on rent. The assessees filed their individual returns separately, in
status of co-owners and showed the rental income under the head ‘House
property’. The Assessing Officer issued a notice u/s.148 to the assessees
stating that there was an AOP in existence and income from the commercial
complex was chargeable to tax in the hands of the AOP. Accordingly, the rental
income had been taxed as business income in the hands of the AOP. On appeal,
the Commissioner (Appeals) held that since share of all members was equal,
rental income should be assessed in the individual hands of the co-owners as
per S. 26.

On Revenue’s appeal, the ITAT observed that :

(1) It was an admitted position that rental income from
the property had been assessed in the hands of the individual co-owners upto
the A.Y. 1994-95.

(2) When the revenue had taken a stand that rental income
upto the A.Y. 1994-95 was assessable in the hands of individual co-owners,
then it could not take a different stand for the subsequent years,
particularly in view of S. 26. As per S. 26, any income which is chargeable
under the head ‘Income from house property’ is to be assessed in the hands
of co-owners if their shares are ascertainable and such income cannot be
taxed in the hands of the AOP.

Hence, rental income in question chargeable under the head
‘Income from house property’ was to be taxed in the individual hands of the
co-owners.

Skyline Caterers (P.) Ltd. v. ITO

A.Y. : 2003-04. Dated : 28-12-2007

S. 32 of the Income-tax Act, 1961 — Expression ‘any other
business or commercial rights of similar nature’ appearing in clause (ii) of
S. 32(1) would include such rights which can be used as a tool to carry on
business — Assessee entitled to claim depreciation on amount paid for
acquisition of all rights under catering contract.

The assessee entered into an agreement with ‘R’ on
16-8-2000 for taking over the catering contract of ‘R’ with HLL against a
consideration of Rs.27 lakhs. Out of the said sum, the assessee paid a sum of
Rs.25 lakhs to ‘R’ as a consideration for acquiring all the rights under the
catering contract between ‘R’ and HLL and balance sum of Rs.2 lakhs was paid
to ‘R’ for not competing with the assessee. The assessee treated the said
amount of Rs.27 lakhs in its balance sheet as goodwill and claimed
depreciation thereon treating the same as commercial rights acquired by it.
The Assessing Officer held that depreciation is admissible only on know-how,
patents, copyrights, trade marks, etc. He further held that the expression
‘similar nature’ in S. 32(1)(ii) would not include goodwill. He, therefore,
disallowed the assessee’s claim for depreciation. On appeal, the Commissioner
(Appeal) upheld the action of the Assessing Officer.

On second appeal, the ITAT held that :

(1) The nomenclature given to the entries in the books of
account is not relevant for ascertaining the real nature of the transaction.
The nature of transaction should be ascertained on the basis of the
agreement between the parties. Therefore, merely because the assessee showed
the said payment on account of goodwill in the books of account, no adverse
inference could be drawn against the assessee.

(2) The payment of Rs.25 lakhs was specifically made for
acquiring all the rights under the catering contract between ‘R’ and HLL and
for acquiring articles and paraphernalia belonging to ‘R’, which were lying
in the canteen. Hence, it could not be said that the payment was either on
account of goodwill or on account of not to compete with the assessee.

(3) The specific intangible assets referred to in S.
32(1)(ii) are followed by the expression ‘any other business of commercial
rights of similar nature’. The specific words in the above section reveal
the similarity in the sense that all the intangible assets specified are
tools of the trade, which facilitate the assessee carrying on the business.
Therefore, the expression ‘any other business or commercial rights of
similar nature’ would include such rights which can be used as a tool to
carry on the business. Since catering business at HLL canteen could be
carried on only with the help of such rights under the contract, the
assessee would be entitled to depreciation.

Dy. CIT v.

Ansal Properties & Industries Ltd.

A.Y. : 2000-01. Dated : 15-2-2008

S. 80-IB of the Income-tax Act, 1961 — Whether amendment by
Finance Act, 2000 in provision of S. 80-IB(10) extending period for completion
of eligible projects to 31-3-2003 was made with effect from 1-4-2001
apparently because as per pre-amended provisions, such period was prescribed
up to 31-3-2001 and date of 1-4-2001 given as an effective date for said
amendment cannot be read in a manner to say that same was applicable only for
and from A.Y. 2001-02 — Held, Yes.

The assessee-company was engaged in the business of
development of mini-townships, construction of house property, villas,
commercial complexes, etc. For the A.Y. 2000-01, the assessee’s claim for
deduction u/s.80-IB(10) in respect of profits derived from a housing project,
was disallowed by the Assessing Officer on the ground that the assessee had
not produced the completion certificate in respect of the said project as
evidence of completion by 31-3-2003, as required by the Section. On appeal,
the Commissioner (Appeals), relying upon the Occupation certificate submitted
by the assessee as additional evidence, allowed the assessee’s claim for
deduction u/s.80-IB(10).

On 2nd appeal, the revenue raised a new plea that the date
of completion of project as earlier prescri-bed in S. 80-IB(10) as on
31-3-2001 was extended to 31-3-2003 by the Finance Act, 2000 only with effect
from 1-4-2001 and hence the benefit of extended date for completion of project
in order to make it eligible for deduction u/s.80-IB was not available to the
assessee for the assessment year 2000-01.

The ITAT observed that :

(1) As is clearly evident from the Explanatory note to
the Finance Bill, 2000, the purpose of amendments made by the Finance Act,
2000 in the provisions of S. 80-IB(10) was to extend the benefit available
under the said provisions even to the housing projects which would be
completed up to 31-3-2003 as against the period up to 31-3-2001 specified
earlier.

(2) The period of commencement of the said projects in
order to become eligible for benefits of S. 80-IB(10) was also
simultaneously specified as up to 31-3-2001 as against the period earlier
prescribed as on or after 1-10-1998, which clearly means that the intention
of the Legislature was to give the benefit of extended period of completion
to all the projects which had already commenced on or after 1-10-1998.

(3) The interpretation given by the Revenue may also lead
to absurd results in the cases of assessees following two different methods
of accounting to recognise the income derived from the projects eligible for
benefit u/s.80-IB. In a case where the assessee follows a project completion
method, he will be able to avail the benefit of S. 80-IB in respect of
entire profits of the projects completed after 31-3-2001 but before
31-3-2003, whereas the assessee following percentage completion method would
be able to avail the said benefits in respect of profits of the project
completed after 31-3-2001 but before 31-3-2003 only to the extent of profit
declared on percentage completion method in the A.Y. 2001-02 and subsequent
year and lose that benefit on the profits of the very same project declared
on percentage completion method in the A.Ys. 1999-2000 and 2000-01.

(4) It is a well-settled canon of construction that in
construing the provisions of beneficial Legislation, the Court should adopt
the construction, which advances, fulfils and furthers the object of the Act
rather than the one, which would defeat the same and render the benefit
illusory.

Based on the above observations, the ITAT held that the
amendment in the provision of S. 80-IB(10) extending period for completion of
eligible projects was made with effect from 1-4-2001 apparently because as per
pre-amended provision such period was prescribed up to 31-3-2001 and the date
of 1-4-2001 given as an effective date for the said amendment cannot be read
in a manner to say that the same was applicable only for and from A.Y. 2001-02
and the subsequent years. Therefore, the benefits of the amended provisions of
S. 80-IB(10) would be available in A.Y. 2000-01 even to the projects completed
within the extended period, i.e., 31-3-2003.

Nicholas Applegate South East Asia Fund Ltd. v. Asst. DIT
(International Taxation)

ITA No. 3875 (Mum.) of 2005

A.Y. : 2001-02. Dated : 23-1-2009

S. 292B r.w. S. 80, S. 139(1) and S. 139(3) — Assessee
company having filed four returns in respect of its four units correctly
disclosing all relevant information without causing any prejudice to Revenue,
such mistake or defect stood removed by operation of S. 292B and consolidated
revised return filed by assessee will relate back to the date of filing of
original returns entitling the assessee to claim carry forward and set off of
loss as claimed in original returns and consolidated in revised returns.

The assessee is a company incorporated in Mauritius under
the Protected Cells Companies Act having four cells/sub-divisions in India.
For the relevant assessment year, it filed separate returns of income in
respect of each cell in India within the time limit prescribed u/s.139(1)
showing short term capital loss and exempt dividend income. Subsequently, the
assessee realised that a consolidated return for all the four divisions was
required to be filed and, accordingly, it filed a revised return incorporating
the incomes/losses of the four divisions. The Assessing Officer treated the
original four returns as invalid and treated the consolidated revised return
as the original return and, since the same was not filed within the time
prescribed u/s.139(1), disallowed the assessee’s claim for carry-forward of
short term capital loss. The CIT(A) allowed the loss to be carried forward.

Since there was a difference of opinion between Members of
the Tribunal, the matter was referred to the Third Member. The Third Member
also held in favour of the assessee. The Third Member relied on the decisions
in the following cases :

(a) Swaran Kanta v. CIT, (1989) 176 ITR 291 (P&H)

(b) CIT v. K. Saraswathi Ammal, (1984) 39 CTR
(Mad.) 35/(1984) 146 ITR 486 (Mad.)

(c) Shirish Madhukar Dalvi v. ACIT, (2006) 203 CTR
(Bom.) 621/(2006) 287 ITR 242 (Bom.)

The Third Member noted as under :

(1) As per Circular No. 179 dated 30th September 1975 of
CBDT, S. 292B has been made to provide against purely technical objections
without substance coming in the way of the validity of assessment
proceedings. It is clear from the language of S. 292B that its aim is to
prevent any return of income, assessment, notice or other proceedings being
treated as invalid merely by reason of any mistake, defect or omission in
such return of income, assessment, notice, other proceedings which are in
substance and effect in conformity with and according to the intent and
purpose of this Act. Substance over form theory is the underlying philosophy
of S. 292B. If in substance and in effect, the return, notice or assessment
is in conformity with or according to intent and purpose of the Act, the
mistake, defect or omission is to be ignored.

(2) If significance of words ‘substance’ and ‘effect’ is
kept in mind, there is no justification to take the four returns separately
and in not considering them together. All the four returns were filed at the
same time with the same Assessing Officer and signed by the same competent
and authorised person. When the total effect of all the four returns is
taken into account, it is clearly found that the assessee did disclose full
information of total loss in time as was needed by the Revenue to compute
assessee’s income/loss. The Revenue has not pointed out any information
needed but not given in the four returns submitted by the four cells.

(3) There was a mistake in filing four returns instead of
one consolidated return of total loss of the assessee company. However, that
mistake, otherwise rendering the returns invalid, is fully taken care of by
provisions of S. 292B.

(4) Four cells of the assessee, by filing four returns,
in which total loss claimed by the assessee was disclosed, did comply in
substance and in effect with the intent and purpose of the Act. It is
nobody’s case that any prejudice was caused to the Revenue because of the
above defect and mistake.

(5) In such a situation, it is not correct to hold that
returns filed earlier were invalid, ineffective and of no legal consequence.
The revised return would, in such circumstances, relate back to the date of
filing of original return. The said return has to be taken along and
considered with the original four returns which contained complete
information for making an assessment. The technical mistake in the four
returns stood removed on filing of the consolidated return. To ignore date
of four returns is to ignore provisions of S. 292B.

The assessee was, therefore, entitled to carry forward such
losses for setting off the same in the subsequent year in terms of the
provisions of S. 80.

National Dairy Development Board v. ACIT

For the relevant assessment year, the assessee claimed
depreciation for the first time on the original cost of certain assets, even
though these assets were purchased and used by it in earlier years.

Jt. CIT v. George Williamson (Assam) Ltd.

A.Y. : 1995-96. Dated : 31-8-2007

S. 40 (a)(i), read with S. 195, of the Income-tax Act, 1961
– In view of Board’s Circular No. 786, dated 7-2-2000, no income had accrued
or arisen in India either u/s.5(2) or u/s.9 in respect of selling commission,
brokerage and other related charges paid to non-resident agents in respect of
sale of tea outside India and, therefore, no tax was deductible u/s.195.
Hence, disallowance made by Assessing Officer was liable to be deleted.

During the relevant assessment year, the Assessing Officer
disallowed the expenditure on selling commission, brokerage and other expenses
in relation to overseas sales paid to non-residents without tax deduction
u/s.195. On appeal, the Commissioner (Appeals) deleted the additions so made.

On revenue’s appeal : the ITAT held that :

1) S. 195 casts an obligation on an assessee to deduct
tax from the payments made to non-residents which are chargeable to tax
under the Act.

2) In Circular No. 786, dated 7-2-2000, the Board has
explained the applicability of S. 195, read with S. 40(a)(i), in relation to
commission paid to foreign agents. As per the said Circular, in respect of
commission and brokerage paid to foreign agents on export sales, no income had
accrued or arisen in India either u/s.5(2) or u/s.9 and no tax was, therefore,
deductible u/s.195. Consequently, expenditure on commission and related
charges payable to non-resident agents could not be disallowed u/s.40(a)(i) on
the ground that tax had not been deducted.

Deduction u/s.80-O was claimed by the assessee which could
not be justified during the assessment proceedings. Finally, the assessee
accepted before the AO that the deduction was claimed erroneously and
inadvertently, as guided by his tax consultant.

Upon disallowance of the same, the penalty u/s. 271(1)(c) was
levied by the AO which was confirmed by the CIT(A).

It is settled law that penalty u/s.271(1)(c) is a civil
liability and the Revenue is not required to prove willful concealment as held
by the Supreme Court in the case of UOI v. Dharamendra Textile Processors &
Ors., 306 ITR 277. However, each and every addition made in the assessment
cannot automatically lead to levy of penalty for concealment of income.

Even if some deduction or benefit is claimed by the assessee
wrongly but bona fidely and no mala fide can be attributed, the penalty would
not be levied. The claim of deduction u/s.80-O was claimed on the basis of
advise of the tax consultant supported by tax audit report. Therefore there is
no concealment or furnishing of inaccurate particulars on the part of the
assessee and hence the penalty was deleted.

J. B. Patel & Co. (Co-owners) v. Dy. CIT

ITA No. 4033 (Ahd.) of 2004

A.Y. : 1993-94. Dated : 29-2-2008

S. 22 and S. 24 of the Income-tax Act, 1961 — Rent, being
only a surrogate measure of annual value, has to be reduced by the expenses
not connected with property but incurred by landlord for enjoyment of property
by tenants, such as salary and bonus to sweeper, pumpman and liftman and
electricity charges for pump motor and common passage.

For the relevant assessment year, the assessee computed
rental income under ‘Income from House Property’ after claiming deductions in
respect of the following expenses :

(a) Salary and bonus paid to sweepers/pumpman/liftman

(b) Electricity charges for pump motor and common
passage.

Since these expenses were not covered by S. 23 and S. 24,
the Assessing Officer denied the assessee’s claim. The disallowance was upheld
by the CIT(A).

The Tribunal, deciding in assessee’s favour, noted as
under :

(1) The rent being charged by the assessee is only a
surrogate measure of the said annual value. The expenditure on the aforesaid
items, i.e. the salary (including bonus) to the maintenance staff of
the facilities such as electric motors, lift, cleaning, etc., as well as
that on the electricity consumed in respect of any common area and the
electric motors, is not attributable directly to the house property as such,
but to its enjoyment by the tenants/users thereof.

(2) In a given case it may happen that the said
expenditure is incurred by the tenant or tenants (collectively), with the
landlord having no locus standi or role therein. Who incurs the expenditure
in the first instance is only a matter of mutual arrangement or convenience
and thus, of no consequence where the bona fides of such expenditure are, as
in the present case, not in doubt. The rent being charged by the assessee,
which represents the measure of its annual value, would, in such a case
stand correspondingly reduced.

(3) As such, although the assessee, being entitled only
to the deductions in respect of the said expenditure in the computation of
income under the said head of income only in terms of its provisions, would
not be entitled to the impugned deductions, we consider that the annual
value of its house property be assumed at the reduced value, i.e.
after deducting the impugned amounts (from the rental), being only in
relation to the expenditure required to be necessarily incurred for the
enjoyment/user of the relevant property and, therefore, can only be
considered as having been included at the said amount, i.e. at cost
by the two parties in the determining of the rental.

(4) The standard deduction admissible to the assessee on
account of repairs @ 1/6th of the annual value of its house property is in
relation to the repairs, whether actually incurred or not, by the assessee
during the relevant year. The impugned sums are not in relation to any
repairs to the house property, but for the maintenance of the facilities
enjoined therewith and necessary for its useful enjoyment.

Vinod Kumar Rai v. CIT

ITA No. 234 (Agra) of 2005

A.Y. : 2002-03. Dated : 21-11-2008

S. 143(1) and S. 263 of the Income-tax Act, 1961 —
Provisions of S. 263 are not applicable where only intimation u/s.143(1) has
been issued.

For the relevant assessment year, the CIT passed a revision
order u/s.263 in respect of the return of income processed u/s.143(1). Before
the Tribunal, the assessee contended that the processing u/s.143(1) is neither
an assessment nor an assessment order and the same cannot be subjected to
revision u/s.263 and the revision order made by the CIT may, therefore, be
declared as bad in law.

On account of difference of opinion between members of the
Bench, the matter was referred to the Third member u/s.255(4).

The Third Member held in favour of the assessee. The Third
Member noted as under :

(a) After an intimation u/s.143(1) is issued, the
Assessing Officer had full power to issue a notice u/s.143(2) and make a
regular assessment u/s.143(3). The Assessing Officer could also proceed
u/s.147/148, if applicable.

(b) There was no explanation as to why these provisions
were not applied in this case.

(c) Various High Courts in India are not unanimous
whether provisions of S. 263 are applicable where only intimation u/s.143(1)
has been issued, whether such intimation is an order or assessment to
attract provisions of S. 263. The Supreme Court, at an appropriate time,
will take up and settle the issue.

(d) It is clear from the record that two reasonable views
of the matter are possible. In such a situation, it has been laid down by
the Supreme Court in numerous cases that the view which is favoring the
assessee has to be taken.

Therefore, it was held that the intimation u/s.143(1)
cannot be sought to be revised u/s.263.

ACIT v. Real Image Tech. (P) Ltd.

ITA No. 201 (Mad.) of 2007

A.Y. : 2001-02. Dated : 15-2-2008

S. 32 of the Income-tax Act, 1961 — Commercial right comes
into existence whenever the assessee makes payment of non-compete fee and such
non compete right is an intangible asset eligible for depreciation.

During the relevant assessment year, the non-compete fees
paid by the assessee in pursuance of non-compete agreements entered into by it
with certain companies was claimed as revenue expenditure and the claim was
disallowed by the Assessing Officer. Under an application to the Joint CIT
u/s.144A, the assessee made an alternate plea for treating such fees as
capital expenditure — it should be treated as an intangible asset u/s.32 and
depreciation be allowed accordingly. The Jt. CIT did not allow the same,
holding that the payment was capital in nature i.e. neither a revenue
expenditure nor a capital expenditure. The CIT(A) allowed the assessee’s
claim.

The Tribunal, relying on the decisions in the following
cases, allowed the assessee’s claim for depreciation :

(b) ACIT v. Radaan Media Works India Ltd., ITA No.
2241 (Mad.) of 2006 dated 14-12-2007

(c) Techno Shares & Stocks Ltd. v. ITO, (2006) 101
TTJ 349 (Mum.)

The Tribunal noted as under :

(1) When a businessman pays money to another businessman
for restraining the other businessman from competing with the assessee, he
gets a vested right which can be enforced under law and without that the
other businessman can compete with the first businessman.

(2) When by payment of non-compete fee, the businessman
gets his right what he is practically getting is kind of monopoly to run his
business without bothering about the competition.

(3) Generally, non-compete fee is paid for a definite
period which in this case is five years. The idea is that by that time the
business would stand firmly on its own footing and can sustain later on.
This clearly shows that a commercial right comes into existence whenever the
assessee makes payment for non-compete fee.

(4) The term ‘or any other business or commercial rights
of similar nature’ has to be interpreted in such a way that it would have
some similarities as other assets mentioned in clause (b) of Expln. 3. The
other assets mentioned are know-how, patents, copyrights, trade marks,
licences, franchises, etc. In all these cases no physical asset comes into
possession of the assessee. What comes in is only a right to carry on the
business smoothly and successfully and, therefore, even the right obtained
by way of non-compete fee would also be covered by the term ‘or any other
business or commercial rights of similar nature’ because after obtaining
non-compete right, the assessee can develop and run his business without
bothering about the competition. The right acquired by payment of
non-compete fee is definitely an intangible asset.

(5) This right (asset) will evaporate over a period of
time (of five years in this case) because after that the protection of
non-competition will not be available to the assessee. This right is subject
to wear and tear by the passage of time, in the sense that after the lapse
of a definite period of five years, this asset will not be available to the
assessee and, therefore, this asset must be held to be subject to
depreciation.

Chandrakant H. Shah v. ITO

ITA No. 3966 (Mum.) of 2008

A.Y. : 2005-06. Dated : 12-1-2009

S. 56(2)(v) of the Income-tax Act, 1961 — Interest-free
loan obtained by assessee from sister concerns for purchase of a flat from one
of them cannot be said to be without consideration because while the assessee
was benefited by interest-free loan, lenders were benefited by profit embedded
in the sale consideration, hence not exigible to tax u/s.56(2)(v).

During the relevant assessment year, the assessee took
interest-free loans of Rs.54.70 lacs from four builders (sister concerns) for
purchasing a flat from one of them. The assessee was also employed with one of
the concerns. The Assessing Officer formed an opinion that the assessee was
working with the group for several decades and, hence, having regard to the
said association, these parties gave such a huge loan to the assessee without
any security and interest as a mark of gratitude irrespective of his repayment
capacity and, therefore, in the absence of any obligation on the part of the
assessee to repay these loans, the entire transaction was of the nature of
gift which was given a colour of loan. Accordingly, he added a sum of Rs.54.45
lacs after giving a rebate of Rs.25,000 u/s.56(2)(v) to the total income of
the assessee.

The CIT(A) held that such loan transactions were abnormal
in the sense that there was no interest or any repayment stipulation, and
hence, the said sums were without consideration and upheld the addition.

The Tribunal, relying on various decisions, deleted the
addition.

The Tribunal noted as under :

(1) All these loans have been shown in the balance sheet
submitted along with the return of income as loans and the lenders have also
confirmed the same as such. Thus, apparently, it is a case of loan
transactions and not a case of gift.

(2) Since some of the loans were repaid partly/fully, it
was a material fact so as to rebut the presumption of the Assessing Officer
that the assessee was not under any obligation to repay the loans and this
fact also proves the assessee’s claim that no opportunity was granted by the
Assessing Officer to the assessee before making such addition.

(3) This type of addition also leads to a situation of
having two provisions for charging one type of income i.e. the
legislature has provided two charging sections i.e. S. 68 and S. 56
(2)(v) which cannot be possible. In that case, the legislature would have
made the provisions of S. 56(2)(v) either of overriding nature by stating
that ‘notwithstanding anything contained in S. 68’ or by providing for
applicability of provisions of S. 56(2)(v) in any other manner, in case
provisions of S. 68 could not be invoked. When a specific provision exists
in law for a particular thing, then that thing is liable to be examined
thereunder only and if that item cannot be taxed under that provision, then
that thing cannot be charged to tax under other provisions of the Act.

(4) In the present case, it is not that provisions of S.
68 were not applicable at all and, hence, the Assessing Officer invoked the
provisions of S. 56(2)(v). On the contrary, the Assessing Officer has made
necessary enquiries in that regard and he has not made addition u/s.68 for
the reason that all the requirements of that section i.e. identity,
creditworthiness and genuineness of transactions have been proved. Hence, a
loan transaction has to be treated as a loan transaction only and it should
be examined in the light of provisions of S. 68 and not under provisions of
S. 56(2)(v) and for this reason alone, this addition is liable to be
deleted.

(5) It is important to note that in S. 56(2)(v), the term
‘consideration’ is neither prefixed by the word ‘adequate’ nor it is
suffixed by the words ‘money or money’s worth’. Hence, if in any transaction
there exists consideration as per the provisions of the Indian Contract Act,
1872 such transaction would not come into the ambit of this section.

(6) Consideration for a promise may consist of either
some benefit conferred on the promisor or detriment suffered by the promisee
or both. Hence, on this criteria, the assessee has gained by way of
interest-free loan and the lenders have suffered by giving interest-free
loans and such suffering has got some value and, therefore, the said
transaction cannot be said to be without consideration.

(7) There is another very important aspect of the matter,
i.e. lenders have sold the flat to the assessee. In that sale
consideration, they have earned profit because it is nobody’s case that the
flat to the assessee has been sold at cost. Therefore, lenders have also
derived some benefit which has got value and, therefore, the same forms
consideration for giving interest-free loans to the assessee. Other three
lenders are the sister concerns of the company who actually built or sold,
hence the benefit derived by such company is a good consideration for other
three lenders. Benefit conferred to a third party not connected with the
promissor or promise in a pecuniary capacity would also be a good
consideration to support the transaction. There can be consideration without
any apparent monetary consideration and the only requirement is that the
consideration should create a legal relationship between the contracting
parties and this fact is not in dispute in the present case. Hence, the
transaction is with consideration. The term ‘consideration’ in legal sense,
is somewhat different from what is generally understood and the Revenue’s
decision is based on general understanding and, therefore, the same is not
correct in law. The transaction meets all the requirements of general law
which is only to be looked into while invoking provisions of S. 56(2)(v)
and, therefore, it is a transaction having a consideration and, therefore,
the same does not fall within the ambit of the provisions of S. 56(2)(v) for
this reason also.

Balan alias Shanmugam Balkrishnan Chettiar v.
Dy. CIT

ITA No. 1859 (Pune) of 2005

A.Y. : 2002-03. Dated : 31-1-2008

S. 14A and S. 48 of the Income-tax Act, 1961 :

(i) Interest on funds borrowed for acquisition of
shares is to be taken into account towards the cost of acquisition for the
purpose of computation of capital gains as prescribed u/s.48(ii)

(ii) Capital gain on the sale of shares being part of
the total income of the assessee and not an exempt income, S. 14A has no
application.

For the relevant assessment year, the Assessing Officer and
the CIT(A) disallowed the assessee’s claim for inclusion of interest paid on
funds borrowed for investment in shares in the cost of acquisition for the
purpose of computing capital gains.

The Tribunal, relying on the decisions in the following
cases, held in favour of the assessee :

(a) CIT v. Mithilesh Kumari, (1973) 92 ITR 9
(Del.)

(b) Addl. CIT v. K. S. Gupta, (1979) 119 ITR 372
(AP)

(c) CIT v. Maithreyi Pai, (1984) 43 CTR 88 (Kar.)/
(1985) 152 ITR 247 (Kar.)

The Tribunal noted as under :

(1) In the past, the assessee had always capitalised the
interest.

(2) S. 48 says that capital gain is to be computed by
deducting from the consideration the cost of acquisition of the asset and
the cost of any improvement thereto.

(3) Once it is established that the assessee had borrowed
the funds for acquisition of shares and the burden of interest had been
capitalised, that interest burden cannot be segregated from the amount of
investment.

In response to the argument of the Revenue that since
interest had a nexus to exempt income, the provisions of S. 14A should be
applied, the Tribunal noted as under :

(1) The words ‘in relation to income which does not form
part of the total income under this Act’ mean if an income does form part of
the total income, then the related expenditure is out of the ambit of the
applicability of S. 14A. The capital gain shown by the assessee had formed
part of the total income of the assessee. Otherwise also, capital gain is
not exempt income and without any ifs and buts, always being taxed in the
hands of a taxpayer. Therefore, the Revenue authorities have proceeded on a
wrong premise that the interest expenditure was in respect of an income
which was exempt or did not form part of the total income.

Sarnath Infrastructure (P) Ltd. v. ACIT

ITA No. 301 (Luck.) of 2006

A.Y. : 2004-05. Dated : 20-12-2007

S. 28(i) and S. 45 of the Income-tax Act, 1961 — Profit
from sale of shares out of investment portfolio was taxable as capital gains
and not as business income.

The assessee-company was dealing in shares both as business
as well as investment and keeping separate accounts in respect of the two
portfolios. Valuation of holdings in investment portfolio was done at cost
only and holdings were reflected in Balance Sheet as investment. For the
relevant assessment year, the profit on sale of shares out of the investment
portfolio was treated by the Assessing Officer as business income and not as
long term capital gain. The CIT(A) upheld the addition.

The Tribunal held that the said profit was to be treated as
long term capital gain and not as business income. The Tribunal’s decision was
arrived at after examining various decisions.

The Tribunal noted as under :

(1) The material on record showed that the assessee had
clear independent portfolios for investment in shares as well for trade and
it has kept separate accounts in respect of the two portfolios.

(2) The shares which were sold out of investment
portfolio during this year and on which capital gains have been offered by
the assessee were held by it for more than two years and in some cases for
more than three years.

(3) No material is brought on record by the Department to
show that demarcation line between business and investment is hazy or that
assessee has not maintained an investment portfolio and it was dealing in
shares only like a trader.

(4) Valuation of holdings has been done at cost for
investment portfolio. They were reflected in the Balance Sheet as
investment.

(5) The frequency of such purchase or sale in this
portfolio is not large enough to doubt that the investment portfolio is only
a device to pay lesser taxes by parking some stock-in-trade in the
investment portfolio.

(6) Turnover to stock ratio in investment portfolio is
very low as compared to that in trading portfolio. Further, there is no
material to show that these shares in the investment portfolio were also
traded in the same and like manner as those which were in stock-in trade
portfolio.

(7) All the sales out of the investment portfolio were
identifiable to purchases made in the same portfolio.

(8) In view of the above facts, the assessee had
discharged its primary onus by showing that it was maintaining separate
accounts for two portfolios and there was no intermingling. The onus then
shifted on the Revenue to show that apparent was not real. There was no
material brought in by the Revenue to show that separate accounts of two
portfolios were only a smoke screen and there was no real distinction
between the two types of holdings. This could have been done by showing that
there was intermingling of shares and transactions and the distinction
sought to be created between two types of portfolios was not real but only
artificial and arbitrary.

Therefore, in absence of any material to the contrary and
on appreciation of cumulative effect of several factors present, it was held
that the surplus was chargeable to capital gains only and the assessee was not
to be treated as trader in respect of sales and purchases of shares in the
investment port-folio.

ITO v. Margasoochi Chits Pvt. Ltd.

ITA No. 995/Bang./2008

A.Y. : 2005-2006. Dated : 16-1-2009

Income-tax Act, 1961 — S. 194A — Whether a chit fund
agreement is not a money lending contract but a special type of contract —
Held, Yes. Whether in a scheme of chit fund there is neither any money
borrowed nor any debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest — Held, Yes.

Facts :

In these cases the AO relying on the instructions issued by
CBDT held that the dividend payments made to the subscribers of chit fund were
in the nature of interest and were liable for deduction of tax at source
u/s.194A. Since the assessees had not deducted tax u/s.194A, the AO passed
orders u/s.201(1) and u/s.201(1A) in respect of five assessees for the
impugned assessment years by creating demand on the dividends paid but not
subjected to tax deduction at source. Since identical orders were passed in
all the fifteen appeals they were taken up together by the Tribunal.

The CIT(A) held that a chit agreement is not a money
lending contract, but a special type of contract and any payment with
reference to a chit agreement being referred to as interest payment does not
arise and installments in chit fund being non-refundable in nature cannot be
equated with ‘deposit’ and consequently, the dividend or discount credited to
the account of the subscribers would not constitute interest. He also held
that the CBDT circulars are not binding on the appellate authorities.

Aggrieved by the orders of CIT(A), Revenue preferred an
appeal to the Tribunal.

Held :

The Tribunal noted that the scheme of Chit Funds is
regulated by The Chit Funds Act, 1982 and S. 3 in Chapter I of the Chit Funds
Act provides that the provisions of the Act override all other laws,
memoranda, articles, etc. save as otherwise expressly provided in the Act. In
view of the non obstante clause the Tribunal held that the definitions of the
expression ‘discounts’, ‘dividends’, ‘prize amount’ as given in the said Chit
Funds Act will prevail over similar definition as found in the Income-tax Act.
The Tribunal held that in a scheme of chit fund there is neither any money
borrowed nor a debt incurred and since interest is defined in the Income-tax
Act as interest payable in any manner in respect of any monies borrowed or
debt incurred (including deposit) and in a chit fund there is neither any
money borrowed nor a debt incurred, the dividends paid by the foreman to the
subscribers of the chit cannot be said to be answering the definition of
interest. The Tribunal held that the demands created u/s.201(1) and
u/s.201(1A) were not justified. It upheld the order of the CIT(A) and
dismissed the appeals filed by the revenue.

Competent Films Pvt. Ltd. v. ITO

ITA No. 3397/Del./2008

A.Y. : 2005-2006. Dated : 9-2-2009

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194C — Whether
an agreement entered into by the assessee with distributors whereby revenue
was shared was a works contract and therefore liable to TDS u/s.194C — Held,
No.

Facts :

The assessee company was engaged in the business of running
of cinema hall, canteen and food courts. It had entered into a Memorandum of
Understanding (MOU) with M/s. Mukta Movies Distributors (Distributors) which
inter alia provided that — the assessee was to be a booking agent for
the cinema hall for three years; the assessee had exclusive rights to book
Hindi films for the said cinema and to run a certain number of shows daily as
per the local laws; the MOU also fixed the rate of admission to the cinema
hall; stated revenue at full capacity and the amount due to the assessee on a
weekly basis subject to the exceptions provided in the MOU.

The distributor raised a bill on the assessee under which
the daily collections were shown and after reducing the payment to be made to
the assessee for the cinema hall hired, a bill was raised for the balance by
the Distributor which bills were paid by the assessee. The Assessing Officer
(AO) held that the MOU was in the nature of a works contract and held the
assessee liable to deduct tax at source u/s.194C. Since the assessee had not
deducted tax on payments made to distributor pursuant to the said MOU, the AO
disallowed a sum of Rs.72,43,965 by invoking provisions of S. 40(a)(ia).

The CIT(A) upheld the order of the AO. Aggrieved, assessee
preferred an appeal to the Tribunal.

Held :

The Tribunal upon a close reading of the agreement held it
to be a profit sharing agreement. It further held that the agreement was not
for services rendered but for sharing the profits with the assessee. Following
the ratio of the decisions of Ahmedabad Bench of ITAT in Sunsel
Drive-in-Cinema (P.) Ltd. v. ITO, (2006) 5 SOT 64 (Ahd.) and Mumbai Bench
of ITAT in ITO v. Shrinagar Cinemas (P.) Ltd., (2008) 20 SOT 480 (Mum.)
it held that there was no works contract and, therefore, the assessee was not
liable to deduct any tax u/s.194C of the Act. The Tribunal found that the
distributor has only given the right to exhibit the films and the assessee had
only rendered the services of exhibiting the films and therefore the question
of deduction of tax by the assessee did not arise. The claim of the assessee
was allowed.

ITO v. H. E. Distillery Pvt. Ltd.

IT(SS)A No. 28 (Bang.)/2008

Block Period : 1-4-1990 to 18-1-2001 Dated : 30-1-2009

Income-tax Act, 1961 — S. 158BFA — Whether for levy of
penalty u/s.158BFA issuance of notice is mandatory — Held, Yes. Whether in the
absence of issuance of pre-requisite notice, the entire penalty proceedings
are to be held as illegal and without jurisdiction — Held, Yes.

Facts :

The assessee, in response to notice u/s158BC, filed return
for block period on 13-8-2001 admitting undisclosed income of Rs.73,80,526.
The AO assessed the undisclosed income at Rs.2,42,47,658 and initiated
proceedings for levy of penalty u/s.158BFA(2) on the ground that the assessee
failed to disclose the income and furnished inaccurate particulars of income.
Against the order assessing undisclosed income the assessee filed an appeal on
the ground that business loss suffered by the assessee during the block period
and depreciation have to be set off against undisclosed income. The CIT(A) and
the Tribunal decided the appeal against the assessee.

The assessee vide letter dated 15-12-2005 was asked to
offer explanation to the proposed penalty. No reply was received from the
assessee. The AO levied a minimum penalty of Rs.1,18,40,726.

The assessee filed an appeal to the CIT(A) and challenged
levy of penalty on the ground that no notice for initiation of penalty was
issued. The CIT(A) cancelled the penalty.

Aggrieved, the revenue preferred an appeal to the Tribunal
where on behalf of the Revenue it was inter alia contended that the assessment
order did mention that penalty proceedings u/s.158BFA(2) are initiated; the
assessee attended the proceedings for levy of penalty; during the penalty
proceedings when the AO was transferred the new AO did issue a notice before
imposing penalty. It was submitted that CIT(A) took a rigid and narrow view
that physical service of notice was a must before imposition of penalty for
concealment. The intention of the AO to levy penalty was never in doubt.

Held :

The Tribunal relying on the decision of the Supreme Court
in the case of 82 ITR 821, 61 ITR 147, 76 ITR 696, 168 ITR 705 and also on the
decision of the co-ordinate bench of the Tribunal in IT(SS)A. No.
21/Bang./2001 in the case of Nemichand held that issuance of notice is a
pre-requisite for assuming jurisdiction to levy penalty u/s.158BFA(2) and in
the absence of issuance of a pre-requisite notice, the entire penalty
proceedings were held to be illegal and without jurisdiction. It held that
CIT(A) was perfectly justified in canceling the penalty. The Tribunal
confirmed the order of CIT(A) and dismissed the appeal filed by the revenue.

36 Mythri Transport Corporation v. ACIT
(2010) 124 ITD 40 (Visakhapatnam)
A.Y. : 2005-06. Dated : 9-1-2009

The assessee was a transport contractor engaged in
transporting bitumen to various points. Since the assessee did not have enough
number of lorries, it hired lorries from others. The tank lorry owners from whom
the lorries were hired were paid amounts after the receipt of bills from the
contractees by the assessee after retaining a certain amount termed as
commission.

The Assessing Officer and the CIT(A) held that the tank lorry
owners were sub-contractors and any payment made to tank lorry owners would come
within the purview of S. 194C.

As per the provisions of S. 194C(2), the sub-contractor
should carry out whole or any part of the work undertaken by the assessee. It
signifies positive involvement in the execution of the whole or any part of the
main work by spending his time, money and energy. In the instant case, there is
no material to suggest that the other lorry owners involved themselves by
spending their time, money and energy or by taking risk associated with the main
contract work. Hence, the payment made to the lorry owners would not fall within
the purview of S. 194C(2).

33 2010 TIOL 272 ITAT (Mum.)
ACIT v. Lakhi Games Impex Pvt. Ltd.
A.Y. : 2003-04. Dated : 29-1-2010

The assessee company was engaged in the business of import of
rough diamonds, cutting and polishing and thereafter export of the same. It had
claimed a sum of Rs.22,69,75,283 as labour charges paid to karigars. In the
course of assessment proceedings, particulars of individual recipients of labour
charges were furnished. The Assessing Officer (AO) issued notices u/s.133(6) to
five parties. Notice was served to one party and the other four notices were
returned unserved by the postal authorities. No reply was received from the
party to whom the notice was served. On being confronted, the assessee filed a
confirmation in respect of the said party. The assessee company also filed
confirmations of the other four parties to whom notices were issued but were
returned unserved. Since PAN in respect of all these five parties did not exist
in the confirmations, the AO doubted the creditworthiness of the parties and the
genuineness of the transactions. He disallowed the labour charges in respect of
these five parties.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
observed that this is not a case of cash credit where creditworthiness has to be
examined. He held that non-availability of PAN cannot make a transaction as
non-genuine. He allowed the appeal filed by the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

The Tribunal agreed with the finding of the CIT(A) that this
is not a case of cash credit and the issue relates to the allowability of
expenditure. Since the parties have confirmed to have received the payments,
merely for want of permanent account numbers the AO was not justified in
disbelieving the transactions by doubting the creditworthiness of the karigars.

The Tribunal upheld the order of the CIT(A) and the ground
raised by the Revenue was dismissed.

The assessee was in the business of selling time share units
in its various resorts. It granted membership for a period of 25/33 years on
payment of a certain amount as membership fee. During the currency of the
membership, the member had a right to holiday for one week in a year at the
place of his choice from amongst the resorts of the assessee. He also had a
right to transfer, bequeath or gift his membership/time-share unit to any
person. The membership fee was received either in lump sum or in instalments. In
addition to the membership fee, the member was liable to pay annual maintenance
charges, irrespective of whether he made use of the resort or not. These charges
were for the maintenance and upkeep of the various resorts. Additional payment
towards utilities like electricity, water, etc. was payable if the resort was
utilised. The assessee was following the mercantile system of accounting. It
treated the membership fee as revenue receipt. However only 40% of the amount
received was offered for taxation in the year of receipt and the balance was
equally spread over the period of membership of 25 or 33 years on the ground
that it was relatable to the services to be offered to the members. The
Assessing Officer (AO) held that as per the accrual system of accounting, the
entire receipt had to be assessed as income in the year of receipt; the Act does
not recognise the concept of deferred income. He made an addition of 60% of the
receipts shown by the assessee as advance subscriptions.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
upheld the contentions of the assessee and deleted the addition in all the
years.

Aggrieved, the Department preferred an appeal to the
Tribunal. At the instance of the assessee a Special Bench was constituted to
consider the following question :

“Whether the entire amount of the time-share membership fee
receivable by the assessee upfront at the time of enrolment of a member is the
income chargeable to tax in the initial year when there is a contractual
obligation fastened to the receipt to provide the services in future over the
term of the contract ?”

(i) From the observations of the Supreme Court in E. D.
Sassoon & Co. Ltd v. CIT, (26 ITR 27) (SC), it is evident that two conditions
are necessary to say that income has accrued to or earned by the assessee.
They are, (i) it is necessary that the assessee must have contributed to its
accruing or arising by rendering services or otherwise, and (ii) a debt must
have come into existence and he must have acquired a right to receive the
payment. In the present case, a debt is created in favour of the assessee
immediately on execution of the agreement. However, it cannot be said that the
assessee has fully contributed to its accruing by rendering services. The
assessee is bound to provide accommodation to the members for one week every
year till the currency of the membership. Till the assessee fulfils its
promise, the parenthood cannot be traced to it.

(ii) The argument of the assessee that the main reason to
spread the balance amount of membership fee over the tenure of membership was
due to the fact that the assessee has to incur heavy expenditure for the
upkeep and maintenance of its resorts was not accepted since the assessee was
collecting separate charges for maintenance and use of utilities and therefore
it was held that matching concept cannot be pressed into service with regard
to the membership fee.

(iii) If the assessee is not able to provide accommodation
in any of its notified resorts, it will try to procure alternate
accommodation. This also will entail additional expenditure on the part of the
assessee over and above paying liquidated damages to the assessee. Unlike the
case in Calcuta Co. Ltd. (37 ITR 1) (SC), the liability in this case is
difficult not only to quantify but also to reasonably estimate it. The
liability is undoubtedly there. However, no scientific basis has been brought
to our notice to quantify the same even reasonably. Even if the assessee had
chosen to provide for the liability every year to comply with the matching
concept, it would have been wholly unscientific and arbitrary.

(iv) In the case of Rotork Controls India, 314 ITR 62 (SC),
the Supreme Court has observed that a provision is recognised when (a) an
enterprise has a present obligation as a result of a past event; (b) it is
probable that an outflow of resources will be required to settle the
obligation; and (c) a reliable estimate can be made of the amount of the
obligation. If these conditions are not met, no provision can be recognised.
In the present case, the assessee has a present obligation as a result of a
past event and outflow of resources is probable to settle the obligation.
Thus, first two conditions are satisfied. However, considering the nature of
activity, it is the third condition which is difficult to satisfy.

(v) Recognising the entire receipt as income can lead to
distortion. Somewhat similar, though not exactly identical, situation was face
by the Supreme Court in the case of Madras Industrial Investment Corporation
Ltd. v. CIT, 255 ITR 802 (SC). The only difference is that in the case of
Madras Industrial Investment Corporation the distortion was supposed to be on
account of expenditure, in the present case the distortion is on account of
the entire income being accounted in the year of receipt.

(vi) Since it is difficult to estimate the liability which
is likely to be incurred in future, more so in the absence of any scientific
basis or historical data, the only way to minimise the distortion is to spread
over a part of the income over the ensuing years.

(vii) The entire amount of time-share membership fee
receivable by the assessee upfront at the time of enrolment of a member is not
the income chargeable to tax in the initial year on account of contractual
obligation that is fastened to the receipt to provide services in future over
the term of contract.